Perspectives

The Seven Principles of Investing

Prepared by David LeCompte

There are not many certainties when it comes to investing, but one of them is market fluctuation.

Below are 7 principles that we utilize at Bridgeworth to help our clients navigate market fluctuation and stay the course during times of uncertainty.

Portfolio Diversification: an investment principle and practice much like the old adage “Don’t put all your eggs in one basket”. The idea is to spread your assets among various types of investment vehicles to balance fluctuations caused by market changes. If one investment loses money, the other investments will hopefully offset those losses.

Asset Allocation: Helps allow you to maximize the probability of achieving your investment goals while balancing risk and reward. According to Brinson, Singer, and Beebower in their article in Financial Analysts Journal in 1991, how you allocate your portfolio across different asset classes accounts for 91.5% of your return. Therefore, getting your asset allocation correct is more important than timing the market or picking the best mutual fund.

Investment Objective: What will you ultimately use the money for?  A common investment objective of many of our clients is making sure they can maintain their standard of living in retirement or that they have adequate resources to fund their children’s education. it is important to clearly define an objective for every investment account you have.

Income Needs The next principle is determining how much money you will need to withdraw from your portfolio. The days of earning an attractive dividend to generate income with low risk appear to have passed us by. Therefore, in today’s low interest rate environment most clients have to take a total return approach to meet their income needs.

Time Horizon: The primary use of time horizon is to help determine the balance between equity assets, fixed-income assets and cash in your portfolio. The longer your time horizon, the more equity investments and less fixed income assets you may consider holding in your portfolio.

Tolerance for Risk: Before you start thinking about your targeted rate of return, you should understand how much risk you are willing to take. We use a Risk Tolerance questionnaire, a comprehensive financial plan and input from the client to help guide us to the appropriate risk profile for each individual. The goal is to take the least amount of risk to achieve the rate of return that will help you achieve your investment objective.

Monitor and Rebalance: Investing is not a one-time event. You should work with your financial advisor to monitor and review your portfolio on a consistent basis. In each review, you should go over each of the first 6 principles to see if any items have changed. You should also check to see if your portfolio needs rebalancing.  Rebalancing is a way to maintain the risk/reward ratio of your portfolio. For example, if you invested your portfolio in a 60% equity and 40% fixed income allocation over time those percentages will change and you will need to rebalance back to the 60%/40% allocation.

Although these principles will not assure you against loss, they are effective practices to help manage risk and increase your ability to achieve your financial goals.

BTN #1-486862.0416

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